Interest rate futures (IRFs) as a risk management tool is picking up steam on the Indian bourses, especially in the National Stock Exchange (NSE).

The NSE, which has a market share of 89 per cent in exchange-traded IRFs, has seen the monthly turnover in this derivative instrument propel from ₹9,146 crore in February 2014 to ₹53,825 crore in March 2015.

The spurt in trading activity in IRFs is partly due to the efforts of the regulators — Reserve Bank of India and Securities Exchange Board of India — to ensure ts success, say capital market observers.

The NSE, which launched NSE Bond Futures II in the third week of January 2014, also put its weight behind this instrument to improve awareness among market participants.

In India, exchange-traded IRFs are standardised contracts based on underlying 10-year Government of India bonds maturing in 2023. An interest rate futures contract is an agreement to buy or sell a debt instrument at a specified future date at a price that is fixed today.

IRFs were launched in the past as well, but had failed as they required physical delivery. However, in its new avatar, this instrument is cash-settled, which probably has played a crucial part in increasing the traction for these.

Another reason why exchange-traded IRFs have turned popular in recent months is the possibility of increased rate volatility in the coming days.

This is especially so given the likelihood of policy rate cuts by the RBI (as it continues monetary easing cycle) and the impending interest rate hike by the US Federal Reserve. Bond prices are inversely correlated to interest rates. IRFs are highly correlated with bond prices. This provides for hedging opportunities, say market watchers.

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